Bitcoin Prices Plunge on Bust of Online ‘Black Market’

Oct. 2 (Bloomberg) -- The price of Bitcoins listed on the
Bitstamp Ltd. exchange plunged as much as 33 percent after
charges were unsealed for the operator of an online marketplace
for drugs and other illicit goods.

Ross William Ulbricht, who runs the “Silk Road Hidden
Website” was charged in federal court in New York today for
running a “sprawling black-market bazaar” where anonymous
users conducted transactions with Bitcoins.

Bitcoins exist as software that’s designed to be
untraceable, making it an attractive tender for those seeking to
trade anonymously via the Web. The price for one unit dropped
today to about $85 from $127. That’s probably due to speculation
that demand for the digital money will shrink after the U.S.
government said it seized the Silk Road website, according to
Jered Kenna, Chief Executive Officer of virtual-currency
exchange Tradehill Inc.

“The question here is: What is it going to do to the
Bitcoin ecosystem?” Kenna said in an interview. “Are we going
to find out that 90 percent of Bitcoins were used on Silk Road,
or that 1 percent of Bitcoins were used there? The Silk Road
just threw a lot of uncertainty into it.”

U.S. prosecutors said today that Ulbricht, known on Silk
Road as “Dread Pirate Roberts,” ran the site as “the most
sophisticated and extensive criminal marketplace on the
Internet” from January 2011 to September 2013. The site
generated sales of about $1.2 billion and about $80 million in
commissions for Silk Road, they said.

Virtual Money

Since being introduced four years ago by a programmer or
group of programmers going under the name of Satoshi Nakamoto,
Bitcoin has become popular way to pay for goods and services on
the Internet, with 11.8 million Bitcoins in circulation,
according to Bitcoincharts, a website that tracks the digital
currency’s activity.

While Bitcoins are designed to be untraceable, that’s not
always guaranteed since most transactions leave a record of the
exchange. Although the currency can be used for illicit goods,
it’s also becoming a popular way to buy and sell legitimate
products and services, from cupcakes to Web hosting.

Bitstamp and several other online exchanges have emerged
where Bitcoin holders are able to trade the digital currency for
dollars, euros and other legal tender. With the growing use of
Bitcoins, driven in part by speculative demand, the currency is
up about tenfold over the last year, according to Bitcoincharts.

Benjamin Lawsky, superintendent of New York’s Department of
Financial Services, said that any regulation of the nascent
Bitcoin industry has to include transparency on who does the
trading of the virtual currency. He said in an interview with
Bloomberg editors and reporters that his primary concern
involved adding anti-money-laundering safeguards.

Illegal Transactions

Ulbricht, 29, was charged with narcotics trafficking
conspiracy, computer hacking conspiracy and money laundering
conspiracy. He tried to have one user killed for attempting to
extort money from the site, prosecutors said in a criminal
complaint unsealed today in Manhattan federal court.

“The site has sought to make conducting illegal
transactions on the Internet as easy and frictionless as
shopping online at mainstream e-commerce websites,” the
government said in a civil forfeiture complaint unsealed today.

Ulbricht was arrested yesterday and appeared in federal
court in San Francisco today, according to Julie Bolcer, a
spokeswoman for Manhattan U.S. Attorney Preet Bharara.

The criminal case is U.S. v. Ulbricht, 13-mg-023287; the
civil forfeiture case is U.S. v. Ulbricht, 13-cv-06919, U.S.
District Court, Southern District of New York (Manhattan).